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Can News Be a Major Source of Aggregate Fluctuations? A Bayesian DSGE Approach

  • Ippei Fujiwara
  • Yasuo Hirose
  • Mototsugu Shintani

We examine whether the news shocks, as explored in Beaudry and Portier (2004), can be a major source of aggregate fluctuations. For this purpose, we extend a dynamic stochastic general equilibrium model, a la Christiano, Eichenbaum, and Evans (2005), by allowing news shocks on the total factor productivity and estimate the model using Bayesian methods. Estimation results on the Japanese and U.S. economies show that (1) the news shocks play an important role in business cycles; (2) a news shock with a longer forecast horizon has larger effects on nominal variables; and (3) the overall effect of the total factor productivity on hours worked becomes ambiguous in the presence of news shocks.

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Date of creation: 29 Aug 2008
Handle: RePEc:cla:levarc:122247000000002352
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